Govt. swings into action, asks all lenders to ‘clean up’.

In what could be one of the biggest frauds in the Indian banking system, state-run lender Punjab National Bank (PNB) reported unauthorised transactions worth ₹11,500 crore in one of its branches in south Mumbai.

The Enforcement Directorate has registered a money laundering case in the matter, which involves Mumbai-based billionaire diamond merchant Nirav Modi. A case has been registered by the Central Bureau of Investigation against him and his business associates as well as a serving PNB official and a retired deputy manager of the bank.

In a communication to the stock exchanges on Wednesday morning, the country’s second largest lender said it had detected some unauthorised transactions in one of its branches for the benefit of a few select account holders with their apparent ‘connivance’. “The quantum of such transactions is $1771.69 million. The matter is already referred to law enforcement agencies to examine and book the culprits as per law of the land,” the communication said.

Stock plunges

The bank’s stock plunged almost 10% through the day and its market capitalisation eroded by nearly ₹3,900 crore by the end of trading on the Bombay Stock Exchange.

The government also swung into action with the Finance Ministry asking all the banks to carry out a clean-up exercise. Financial Services Secretary Rajeev Kumar said the government will not tolerate ‘unclean banks’ while adding that the case dates back to 2011, when a fraudulent Letter of Undertaking (LoU) was submitted to PNB. “However, the PNB case is an isolated one. The CBI is looking into the case, and 10 employees of the bank have been suspended,” Mr. Kumar added.

“I don’t think this is out of control or too big a worry at this point,” Financial Services Joint Secretary Lok Rajan said.

On January 29, Anveesh Nepalia, the deputy general manager of PNB’s zonal office filed a complaint on the issue with the CBI.

Mr. Nepalia alleged that Nirav Modi, Nishal Modi, Ami Modi and Mehul Choksi — all of whom are partners at Diamond R US, Solar Exports and Stellar Diamonds, conspired with a retired bank employee and a current staffer to defraud the bank.

The retired PNB official Gokulnath Shetty and current employee Manoj Kharat fraudulently issued LoUs worth ₹280 crore to these companies in 2017, without going through the proper channels and bypassing a lot of procedures.

Bank officials stumbled on the deceitful transactions on January 16 this year, when these three firms approached the branch and presented a set of import documents with request to allow buyers’ credit for making payment to overseas suppliers.

Since there was no sanction limit in the name of these firms, the branch insisted on 100% cash margin for issuing LoUs for raising buyers’ credit.

However, the firms contested they had been availing this facility in the past, although branch records did not have details of any such facility.

A senior CBI officer said it has booked Mr. Shetty and Mr. Kharat of PNB, along with Nirav Modi, Ami Modi and Nishal Modi, the owners of the two diamond firms.

All the accused have been booked for cheating and criminal conspiracy under the Indian Penal Code along with criminal misconduct by a public servant under the Prevention of Corruption Act.

“Inquiries against all the accused are under way. We are examining the bank records and details of the LoUs issued during the period specified by Mr. Nepalia in his complaint,” the officer said.

The bank has alleged the accused employees issued a series of LoUs to the three companies in favour of Hong Kong branches of Allahabad Bank and Axis Bank.